Jackson Corporation\'s bonds have 25 years remaining to maturity. Interest is pa
ID: 2637227 • Letter: J
Question
Jackson Corporation's bonds have 25 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. The bonds have a yield to maturity of 10%. What is the current market price of these bonds? Round your answer to the nearest cent.
Wilson Wonders's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? Round your answer to two decimal places.
he real risk-free rate of interest is 2%. Inflation is expected to be 3% this year and 6% during the next 2 years. Assume that the maturity risk premium is zero.
What is the yield on 2-year Treasury securities? Round your answer to two decimal places.
%
What is the yield on 3-year Treasury securities? Round your answer to two decimal places.
%
A Treasury bond that matures in 10 years has a yield of 3%. A 10-year corporate bond has a yield of 10%. Assume that the liquidity premium on the corporate bond is 0.7%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.
Explanation / Answer
Jackson Corporation
Interest= 9%*$1000= 90
Par Value= $1000
Term= 25 years
Hence, the Market Price can be computed as:
Present Value of Coupon + Present Value of Face Value, discounted at Yield on the bond
=> Coupon * Annuity Factor(10%, 25years) + Face Value * Present Value factor(10%, 25years)
=> 90*9.077 + 1000* 0.0923
=909.23
Wilson Wonders
Yield to maturity can be computed as follows:
{I + [(F-P)/n]} / [(F+P)/2]
Interest=I= 10%*$1000= $100
Face Value= F= 1000
Price= P= 850
Term= n= 12years
Hence, Yield to maturity= {I + [(F-P)/n]} / [(F+P)/2]= {100 + [(1000-850)/12]} / [(1000+850)/2]
= 12.16%
Treasury Securities
Risk free= Rf= 2%
Inflation= I= 3%
Yield on Treasury Securities= {(1.02*1.03)-1}*100= 5.06% p.a
Hence, yield on 2 year Treasury Securities = {(1.0506*1.0506)-1}*100= 10.38%
Hence, yield on 3 year Treasury Securities = {(1.0506*1.0506*1.0506)-1}*100= 15.96%
Risk Premium on Corporate Bond
Yield on Treasury Bond= Risk free*Inflation= 3%
Yield on Corporate Bond= Rf* Inflation* Risk Premium*Liquidity Premium= 10%
Liquidity Premium= 0.7%
Hence, Risk Premium= {1.10/(1.03*1.007)-1} *100= 6.05%
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